Immediate response to the local government finance policy statement

The government has today published a policy statement on local government finance and a set of changes to plans for local government funding reform. This follows a consultation over the summer.

The government is putting in place a new system for allocating funding between councils, which will take account of new official assessments of councils’ spending needs and their relative abilities to raise revenues themselves via council tax. Changes will be phased in over three years from 2026–27 to ease the transition, with funding floors in place to limit losses for those receiving less funding under the new system than currently. As we have said before, these funding reforms are welcome: for arguably 20 years, England has lacked a rational system for allocating funding between councils. This overall judgement has not changed.

The government has today announced a set of changes to its initial reform proposals, which we assess here:

• The government has updated spending needs formulas to reflect more recent data, including new official indices of the relative deprivation of different areas, and to ensure that the weights on different formulas reflect more recent spending outturns. These are clear improvements. In the case of deprivation, continuing to allocate funding in 2028-29 on the basis of IMD2019, which was itself based on data available with some lag, would not have been sensible now that more up-to-date measures are available. Updating the weights gives slightly more weight to temporary accommodation services.
• The government has also made some welcome changes that we recommended in a technical peer review commissioned by MHCLG, which the government has also published today. These include refining the statistical model used to proxy for the impact of local council tax support in the measure of the taxbase, and reducing the weighting on commuters and visitors, recognising that they do not place the same demands on council services as residents. Given the available evidence, the choice of the precise weights to place on commuters and visitors, and the decision to reduce the extent to which remoteness is reflected as a cost driver, are matters of judgement.
• The government now plans to account for population projections in assessments of need for some services (specifically the foundation, adult social care and fire formulas). In principle, using projections should help ensure funding is closer to spending needs in future years. But if population projections are not more accurate than they have been in recent years, the case for using them in this way is not clear-cut. It is not clear why the government proposes to use such projections for some formulas and not others.
• The government has also announced several changes which will favour a particular set of councils – those that received any of a £600 million recovery grant which was allocated in 2025-26 based on councils’ taxbases and deprivation (using a measure of deprivation which has now been superseded). Around half of councils received this grant, including almost all metropolitan district councils, although the amount areas received varied from 40p to £40 per resident. These councils will now retain any recovery grant they were allocated in 2025-26 for the next three years, rather than this funding being redistributed under the new system. Upper-tier councils in this group will also now be guaranteed more generous floor protection. It is difficult to see a principled basis for these decisions other than to achieve an overall allocation more in line with the government’s subjective judgement. Government should avoid such formula bypasses becoming a habit.

Looking purely at changes from the needs assessments published as part of the initial consultation, and those published today, nine councils (Luton and eight London boroughs) have seen their share of assessed relative needs increase by at least 10%. This is likely due to them being relatively more deprived on the new measure. There are 30 councils which the government now assesses need a share of funding that is more than 10% less than in the initial consultation. This group is made up predominantly of shire district councils, as well as Blackpool (-11%) and the City of London (-76%). In the latter case, this large revision is likely to reflect a bespoke adjustment to how travel times are factored into councils’ costs of delivering services, which may be reasonable given the unique characteristics of the City of London.  

These are not predictions for the overall impact of the set of changes announced today, as needs assessments are only one element of the new funding system, and the government has also made changes to other aspects. For some councils, these various factors will pull in opposite directions.

The precise impacts of the funding reforms as a whole are still difficult to model at this stage. The government will publish funding allocations for individual councils at the provisional settlement next month.